Nike – Lean in China?

Nike has deservedly received a lot of flack for sweatshop factories, but it appears they are making major efforts to improve. In China alone they have a supply chain of almost 180 factories employing 210,000 people, making almost one out of every three pairs of Nike shoes. Perhaps even more remarkable is how they are inoculating themselves against wage inflation by recognizing the value of people.

In Dongguan, a south China manufacturing town where the average shoe industry wage is Rmb960 ($145) a month, one of Nike’s largest contract factories now pays its workers Rmb1,472. Such a differential should spell trouble in an industry where many are struggling with rising costs. But Yue Yuen Industrial is thriving – a fact that could hold lessons for manufacturers far beyond Dongguan and the Pearl River Delta region in southern Guangdong province.

Nike is beginning to understand the power of people, even along the lines of the "respect for people" second pillar of lean manufacturing. For starters, they are reducing overtime to avoid burning out their employees.

Yue Yuen’s relatively dear labour costs, which are more than 50 per cent higher than the industry average, also mask productivity incentives. At most shoe factories in Dongguan, the average monthly wage is largely determined by working hours and overtime, often in excess of statutory limits. But at Yue Yuen, only about two-thirds of the average salary is attributable to hours worked. “If you have overtime problems you will also have quality and delivery issues,” says Hannah Jones, Nike’s vice-president for corporate responsibility.

The incentive program isn't based purely on unit output, but on a variety of continuous improvement metrics.

The remaining third of Yue Yuen’s average salary is derived from productivity and quality targets achieved by team-based assembly lines modelled on the “lean” manufacturing principles pioneered by Toyota. “[Workers] can’t hand off a bad piece [to another team member] and kiss it goodbye,” says Sonya Durkin-Jones, Nike’s compliance director for North Asia. Each of Nike’s lean manufacturing lines is branded with the acronym “NOS” – for the Latin novus ordo seclorum, or “a new order for the ages”. The phrase is also emblazoned on the back of US dollar bills, which perhaps explains how it came to be ingrained in Nike’s institutional memory.

The employees are being respected, rewarded for their brainpower in addition to their pair of hands. Productivity isn't just a function of driving people to work harder, it's a function of how smart people work. Companies invest considerable time in training new employees, and that investment needs to be recognized as part of the value of employees.

Yue Yuen’s wage premium pays for itself in terms of increased productivity and quality; another benefit is that the company faces fewer of the recruitment headaches afflicting cheaper rivals in an environment where the balance between demand and supply has swung in labour’s favour recently. “We have been constantly challenged by the environment – by all the overtime offered by some of our competitors,” says Johnson Tong, a manager at Pou Chen. “But workers want to make money, not [rack up] hours.”

“In this environment you want to reduce your turnover,” adds Ms Jones. “Time to market is much more of a driver for us. How do you achieve that if you are jumping from one factory to another? It’s not about chasing labour costs. It’s about stability and innovation.”

Exactly. One last point: remember that this change in mindset is happening at Chinese factories which already have cheap (although inflating rather rapidly) labor costs. To compete globally basic lean manufacturing is simply no longer enough; you must continually improve and push the envelope.